Ikea Economics Lure Central Bankers Seeking New Tools

ECB President Mario Draghi is poised to go Scandinavian next month when most economists expect him to make the ECB’s deposit rate negative, in effect turning it from a payment to a fee. Photographer: Jasper Juinen/Bloomberg

May 22 (Bloomberg) -- If you’ve ever bought a folding futon
bed from Ikea you’ll probably have been both impressed and
perplexed by Scandinavian ingenuity.

It’s the same when it comes to central banking. Policy
makers are looking to Sweden, Norway and Denmark for off-the-shelf measures they can build at home.

Sweden invented the central bank, establishing the Riksbank
in 1668 after the public lost confidence in the paper money
produced by Stockholms Banco. Bank-rescue strategies in the
1990s and efforts to improve central-bank communications through
forward guidance taught lessons to first responders in the
recent global financial crisis.

Now, the European Central Bank is considering copying
Sweden and Denmark by charging banks to hold their money. And
the Bank of England may mimic steps taken by Sweden and Norway
to tame a housing boom.

They’ve drawn warnings from Michala Marcussen of Societe
Generale SA that negative deposit rates and mortgage-focused
regulations carry risks: “Central banks, learn from thy
neighbor!” she said in a report this week.

Sweden cut its deposit rate to minus 0.25 percent in July
2009 and held it there until September 2010. Denmark followed in
July 2012 until last month as it successfully prevented an
appreciation in the krone from capital inflows.

Going Scandinavian

Draghi is poised to go Scandinavian next month when most
economists expect him to make the ECB’s deposit rate negative,
in effect turning it from a payment to a fee. The idea is that
banks would respond by seeking returns elsewhere through loans
to companies and consumers. A decline in the euro would also be
a welcome byproduct to exporters such as Airbus Group NV.

Denmark’s experience suggests reason for caution, according
to Helge J. Pedersen, chief economist at Nordea Bank AB in
Copenhagen. That’s because a negative deposit rate threatened
bank profits, forcing them to pass the cost on to consumers. The
result was that lending remained stymied.

“It’s risky to do it,” said Pedersen.

As for Carney, he’s also looking toward Scandinavia by
warning rising housing prices pose the biggest risk to his
economy. That may force him to introduce rules to curb mortgage
lending.

Trouble is, restraints haven’t much tamed animal spirits
from Stockholm to Oslo. Swedish consumer debt of homeowners has
ballooned to 370 percent and apartment prices, which have almost
tripled since early last decade, rose at an annual rate of 8
percent in April. In Norway, the housing market is rebounding
rapidly, reversing a 6 percent drop in the last seven months of
2013.

Similar measures in the U.K. also could fall flat, yet
still force up the pound and gilt yields, imposing deflationary
pressure similar to the Sweden, says Marcussen, who suggests
governments may need to take fiscal steps or build more houses.